Personal Finance

3 Stocks to Invest in Big Pharma

Lab researcher examining liquid.

Large drugmakers may not deliver mind-blowing growth, but they can certainly provide the peace of mind that allows investors to get a good night's sleep. These large drugmakers, more commonly known as "Big Pharma," often pay market-topping dividends and tend to be largely recession-resistant, which makes them particularly attractive to long-term investors.

With this in mind, we asked three of our healthcare-focused Foolish contributors what Big Pharma stock they believe could be worth your investment dollars. Making the list were healthcare conglomerate Johnson & Johnson (NYSE: JNJ) , cancer giant Roche Holding Ltd. (NASDAQOTH: RHHBY) , and rare-disease specialist Shire PLC (NASDAQ: SHPG) .

Lab researcher examining liquid.

Image source: Getty Images

The epitome of set it and forget it

Sean Williams ( Johnson & Johnson ): Big Pharma stocks typically don't offer the same rapid growth potential as biotech stocks, but in return for slower growth prospects, investors receive the peace of mind of healthy profits and steady returns. Among Big Pharma, the company I'd suggest investors steer toward is Johnson & Johnson.

There are two major reasons why Johnson & Johnson could be the perfect Big Pharma stock for investors to consider.

To begin with, the company is comprised of more than 250 subsidiaries, which allows J&J to divest slower-growing assets and acquire assets that would complement higher-growth areas without disrupting its core business. Over the past couple of years, J&J has divested vascular technology company Cordis and Ortho-Clinical Diagnostics, a company that provides disease screenings.

Meanwhile, J&J recently announced the acquisition of Actelion , a Swiss-based drug developer focused on pulmonary arterial hypertension, for $30 billion. This deal is expected to increase J&J's long-term growth rate by 1.5% to 2%.

The other catalyst for J&J is that its business is becoming more reliant on its faster-growing pharma segment. In 2016, pharma sales accounted for 46.6% of J&J's sales, up more than nine percentage points from 2011. With the acquisition of Actelion, J&J's reliance on pharma sales could near 50% in the years to come, with medical devices and consumer health products making up the remainder. In 2015, J&J announced its intention to file 10 new drug applications with the Food and Drug Administration by 2019 for therapies it believes will hit at least $1 billion in peak annual sales.

Were this not enough, J&J has also increased its dividend for 54 consecutive years (one of the longest streaks for a publicly traded company) and is just one of two publicly traded companies to bear Standard & Poor's "AAA" credit rating. Johnson & Johnson is the epitome of the set-it-and-forget-it stock, and patient long-term investors should be handsomely rewarded.

Pill knocking out a cancer cell.

Image source: Getty Images.


Bucking the trend

Cory Renauer ( Roche Holding Ltd. ): Big pharma stocks are far less volatile than their smaller peers, but this stability comes at a price. A recent study found big pharma returns on research and development investment hit a six-year low of just 3.7% last year. Mid-tier drugmaker returns have also been sinking, but still trounced the big players with a 9.9% return on R&D spending last year.

A whopping $9.9 billion R&D budget last year makes Roche a top spender, but it has a lot more to show for it than many of its big pharma peers. Last April it earned approval to market Venclexta for the treatment of a genetically defined group of leukemia patients. The cancer therapy is expected to generate about $2 billion in annual sales at its peak, and a slew of studies combining it with Roche drugs could help it run even further.

Roche also launched the first PD-L1 inhibitor for the treatment of bladder cancer last year. It's got some catching up to do relative to PD-1 blockers from Merck and Bristol-Myers Squibb , but it has already earned an expansion to a large lung cancer indication. Again, the big pharma is running dozens of clinical trials that could help it earn approval for treatment of a much larger variety of malignancies and drive peak annual sales of the drug above $3 billion.

Perhaps the most important new drug candidate emerging from Roche's pipeline is still under FDA review. Ocrevus is the first therapy to show a significant benefit for about 15% of the world's multiple sclerosis patients with the most aggressive form of the disease. The Agency is expected to announce a widely expected approval soon. If given a thumbs up, peak annual sales of the drug could reach $4 billion.

Roche has boosted its annual dividend (in Swiss francs) for 33 consecutive years, and at recent prices, the stock offers a nice 3.4% yield. With an industry leading R&D machine and commitment to return the value it creates to its shareholders, this might be the perfect stock for investing in big pharma.

Doctor high-fiving small child sitting with her mother.

Image source: Getty Images.


A rare find

Brian Feroldi (Shire): Investing in biotechs that focus on rare diseases can be a smart way to go. These companies often face no competition, so they get to charge huge premiums for their products.

One of the largest rare-disease focused companies in the world is Shire. This company holds a leading market position in a number of rare disease states, such as hemophilia, hereditary angioedema, and more, but it also has products that address more common diseases like attention deficit/hyperactivity disorder (ADHD).

Shire has been on an acquisition binge as of late that promises to drive substantial growth from here. Last summer it spent $32 billion to acquire Baxalta, another rare-disease-focused biotech. The deal nearly doubled the company's annual revenue and brought the number of compounds in development up to 40. The "new" Shire is heavily focused on realizing synergies from the deal, and it expects $700 million in cost savings by 2019.

With cost savings on the way and a pipeline that is packed with potential, Shire looks built for growth. In fact, management is projecting that revenue will exceed $20 billion by 2020. If true, that suggests that the company's top line will grow by double-digits annually from here.

With shares trading around 11 times forward earnings projections, Shire offers biotech investors a good shot at growth for a value price.

10 stocks we like better than Johnson and Johnson

When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor , has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Johnson and Johnson wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of February 6, 2017

Brian Feroldi has no position in any stocks mentioned. Cory Renauer owns shares of Johnson and Johnson. Sean Williams has no position in any stocks mentioned. The Motley Fool recommends Johnson and Johnson. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story


Other Topics


Latest Personal Finance Videos

    The Motley Fool

    Founded in 1993 in Alexandria, VA., by brothers David and Tom Gardner, The Motley Fool is a multimedia financial-services company dedicated to building the world's greatest investment community. Reaching millions of people each month through its website, books, newspaper column, radio show, television appearances, and subscription newsletter services, The Motley Fool champions shareholder values and advocates tirelessly for the individual investor. The company's name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king -- without getting their heads lopped off.

    Learn More